Airline fares: the tail of the ancillary dog!

Jul 31, 2017

As Ryanair looks set to open its fourth innovation lab, the Irish carrier edges closer to its stated goal of being the ‘Amazon of travel’

“Not again”, the cry must go up from airline chiefs as Ryanair gives its regular shout that fares will be slashed. It seems a mandatory part of the cut-price airline’s quarterly profit statement, and equally regularly sends other airlines’ shares plummeting across international stock markets. The latest Ryanair promise, out with last week’s figures, is for a 5% fall over the summer and one of 9% across the months to end-March next year.

Easy for him, must be the mutter, with at least a quarter of sales in the form of ancillaries on which the margins, according to the latest calculations by analysts at Deutsche Bank, are “at least 65%! “ As they commented: “Therefore whilst ticket profitability is clearly relevant, it is the tail to the ancillary dog."

Given the firepower for future cuts that Michael O’Leary is building up with on-line sales and services, it might be a good idea to keep an eye on Ryanair’s innovation engine – Ryanair Labs. It now has 200 staff in Dublin, 180 in Wroclaw in Poland, there will be 250 in the latest centre to be opened, in Madrid, and a fourth centre is being planned. This is what is driving the group towards O’Leary’s ambition – to be the Amazon of travel.

As he said, announcing the Madrid centre, Ryanair is heading towards becoming “a big data platform with an airline attached…the airline will be like a tick. The potential of the thing is enormous.”

Personalisation power

Ryanair Labs is now tapping data accumulated from its vast passenger database – it expects to carry an annual 130-million-plus this financial year. With that it is predicting customer needs and spending patterns. As the head of Ryanair Labs, John Hurley, told online magazine Future Travel Experience: “We know where our customers are going, who they’re travelling with, and so on. So if we give you an offer, it’s going to be relevant to a destination you’re going to in a specific time period. No more of these stupid, mindless emails that are just spam.”

No more of these stupid, mindless emails that are just spam

Personalisation, says Hurley, is what it is all about. Of course, even if it has taken it further than most, Ryanair is not alone. All the major airlines are deep in the necessary technologies.

Take British Airways: “So many brands have done such an incredible job with data and technology to drive personalisation and relevance, that it is very much becoming a hygiene factor from the way customers interact with brands,” said Jo Boswell, head of customer value management, at British Airways. This “hygiene factor” spurred the airline into developing a personalisation programme called ‘Know Me’, five years ago.

The British Airways numbers are such, says Boswell, that it “can now uniquely ID every single customer who flies with British Airways – almost 110 million customers to date. And BA has sufficient information on those customers to be able to personalise the experience for nearly 55 million”

However, few carriers are as aggressive with the data or on ticket pricing as Ryanair, although according to analysis from US brokers Zacks, across the Atlantic “airfares decreased in almost every month of 2016”. This year, however, is meant to be different there, with fares rising. En route to that, most US carriers are looking to curb capacity.

Zacks’ analysts comment that: “Delta has put the cap on 2017 system capacity growth at 1% in keeping with its objective of maintaining capacity discipline. According to a Bloomberg report, this year, capacity expansion for US airlines is expected to be the least since 2013. This factor also supports air fare hikes in the current year.”

Demand factors

Airline demand also will have helped support prices (if this is indeed the outcome). Airlines for America – the largest airline trade association in the US –has predicted that “the three-month period (Jun 1–Aug 31) will be the busiest for US carriers in terms of air travel. Strong demand for travel on the back of an improving economy is expected to drive passenger volumes to an all-time high.” The volume (234.1 million) is likely to be 4% higher than the year-ago figure.

Major carriers in Europe have also been talking up their chances of higher fares. Air France and Lufthansa, as well as IAG, have given better-than-expected guidance on revenue trends, helped by buoyant long-distance flight demand.

“Major European airlines are ‘upbeat on improved trading’ and ‘optimistic’ about ticket-pricing trends, broker Barclays analyst Oliver Sleath said in a note a few weeks ago. The broker raised estimates for earnings for Air France-KLM by 70% for this year while lifting Lufthansa’s by 30%.

…‘gotcha fees’ are becoming the norm wherever you fly

Some of his peers, however, are already getting cold feet. Bank of America Merrill Lynch analysts cited risks on ‘short haul and long-haul traffic’. It is a question, of course, as Bloomberg commented, of competition. It quotes the flight search app, Hopper, showing the average European airfare price down 18% for summer 2017.

And as Bloomberg warns, the trade-off for cheaper tickets is unbundled fares with ‘gotcha fees’ becoming the norm wherever you fly.